Exploring Brand Associations in the Indian Context: Cafe Coffee Day Net Present Value (NPV) / MBA Resources

Introduction to Net Present Value (NPV) - What is Net Present Value (NPV) ? How it impacts financial decisions regarding project management?

NPV solution for Exploring Brand Associations in the Indian Context: Cafe Coffee Day case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Exploring Brand Associations in the Indian Context: Cafe Coffee Day case study is a Harvard Business School (HBR) case study written by S. Ramesh Kumar, Eric Minj. The Exploring Brand Associations in the Indian Context: Cafe Coffee Day (referred as “Associations Cafe” from here on) case study provides evaluation & decision scenario in field of Sales & Marketing. It also touches upon business topics such as - Value proposition, Customers, Emerging markets, Strategy.

The net present value (NPV) of an investment proposal is the present value of the proposal’s net cash flows less the proposal’s initial cash outflow. If a project’s NPV is greater than or equal to zero, the project should be accepted.

NPV = Present Value of Future Cash Flows LESS Project’s Initial Investment

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Case Description of Exploring Brand Associations in the Indian Context: Cafe Coffee Day Case Study

India has traditionally been a tea drinking nation. The association of youth culture and coffee drinking opened up exciting avenues for the cafe market that earlier used to have lower priced offerings from udupi (small restaurants) cafes. The organized cafe market-which was branded and professionally run in terms of its marketing efforts-in India, it was worth INR 93100 million and was growing at 25-30% annually. Sensorial experience was vital to a cafA? brand. Cafe Coffee Day had a striking lead in terms of pioneering the cafes in India. With brands such as Barista Lavazza, Gloria Jean's Coffees, and Au Bon Pain in the fray, the challenge for Cafe Coffee Day was to strengthen its strategic brand associations, taking several considerations into account. In categories such as beverages, brands need to build themselves on both symbolic and hedonic appeals besides offering good attributes and benefits. With cafes being associated with the urban youngsters, the challenge for brands is to ensure strong brand associations as they are a logical outcome of attributes, benefits, symbolism, and hedonism. With competitive brands of cafes offering quality of coffee that would no longer be a differentiator, Cafe Coffee Day had to establish itself on brand associations that would nurture its associations and give it a sustainable edge over the competitors. Such an approach proposes a few challenging questions : How should the brand differentiate itself from its competitors? What were the dominant associations of the brand, and how could it use these associations? How did loyal consumers of the brand perceive the brand? How could the brand develop unique associations and communicate these to its consumers? The case study emphasizes the importance of brand associations in a dynamic environment that is affected by competitive brands and changing lifestyles of consumers.

Case Authors : S. Ramesh Kumar, Eric Minj

Topic : Sales & Marketing

Related Areas : Customers, Emerging markets, Strategy

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Calculating Net Present Value (NPV) at 6% for Exploring Brand Associations in the Indian Context: Cafe Coffee Day Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10008298)	-10008298	-	-
Year 1	3454399	-6553899	3454399	0.9434	3258867
Year 2	3963852	-2590047	7418251	0.89	3527814
Year 3	3963235	1373188	11381486	0.8396	3327609
Year 4	3244365	4617553	14625851	0.7921	2569841
TOTAL			14625851		12684131

The Net Present Value at 6% discount rate is 2675833

In isolation the NPV number doesn't mean much but put in right context then it is one of the best method to evaluate project returns. In this article we will cover -

Different methods of capital budgeting

What is NPV & Formula of NPV,
How it is calculated,
How to use NPV number for project evaluation, and
Scenario Planning given risks and management priorities.

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Capital Budgeting Approaches

Methods of Capital Budgeting

There are four types of capital budgeting techniques that are widely used in the corporate world –

1. Net Present Value
2. Profitability Index
3. Payback Period
4. Internal Rate of Return

Apart from the Payback period method which is an additive method, rest of the methods are based on Discounted Cash Flow technique. Even though cash flow can be calculated based on the nature of the project, for the simplicity of the article we are assuming that all the expected cash flows are realized at the end of the year.

Discounted Cash Flow approaches provide a more objective basis for evaluating and selecting investment projects. They take into consideration both –

1. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Associations Cafe shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.
2. Timing of the expected cash flows – stockholders of Associations Cafe have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.

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Formula and Steps to Calculate Net Present Value (NPV) of Exploring Brand Associations in the Indian Context: Cafe Coffee Day

NPV = Net Cash In Flowt1 / (1+r)t1 + Net Cash In Flowt2 / (1+r)t2 + … Net Cash In Flowtn / (1+r)tn
Less Net Cash Out Flowt0 / (1+r)t0

Where t = time period, in this case year 1, year 2 and so on.
r = discount rate or return that could be earned using other safe proposition such as fixed deposit or treasury bond rate. Net Cash In Flow – What the firm will get each year.
Net Cash Out Flow – What the firm needs to invest initially in the project.

Step 1 – Understand the nature of the project and calculate cash flow for each year.
Step 2 – Discount those cash flow based on the discount rate.
Step 3 – Add all the discounted cash flow.
Step 4 – Selection of the project

Why Sales & Marketing Managers need to know Financial Tools such as Net Present Value (NPV)?

In our daily workplace we often come across people and colleagues who are just focused on their core competency and targets they have to deliver. For example marketing managers at Associations Cafe often design programs whose objective is to drive brand awareness and customer reach. But how that 30 point increase in brand awareness or 10 point increase in customer touch points will result into shareholders’ value is not specified.

To overcome such scenarios managers at Associations Cafe needs to not only know the financial aspect of project management but also needs to have tools to integrate them into part of the project development and monitoring plan.

Calculating Net Present Value (NPV) at 15%

After working through various assumptions we reached a conclusion that risk is far higher than 6%. In a reasonably stable industry with weak competition - 15% discount rate can be a good benchmark.

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 15 %	Discounted Cash Flows
Year 0	(10008298)	-10008298	-	-
Year 1	3454399	-6553899	3454399	0.8696	3003825
Year 2	3963852	-2590047	7418251	0.7561	2997242
Year 3	3963235	1373188	11381486	0.6575	2605891
Year 4	3244365	4617553	14625851	0.5718	1854976
TOTAL					10461934

The Net NPV after 4 years is 453636

(10461934 - 10008298 )

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Calculating Net Present Value (NPV) at 20%

If the risk component is high in the industry then we should go for a higher hurdle rate / discount rate of 20%.

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 20 %	Discounted Cash Flows
Year 0	(10008298)	-10008298	-	-
Year 1	3454399	-6553899	3454399	0.8333	2878666
Year 2	3963852	-2590047	7418251	0.6944	2752675
Year 3	3963235	1373188	11381486	0.5787	2293539
Year 4	3244365	4617553	14625851	0.4823	1564605
TOTAL					9489485

The Net NPV after 4 years is -518813

At 20% discount rate the NPV is negative (9489485 - 10008298 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Associations Cafe to discount cash flow at lower discount rates such as 15%.

Acceptance Criteria of a Project based on NPV

Simplest Approach – If the investment project of Associations Cafe has a NPV value higher than Zero then finance managers at Associations Cafe can ACCEPT the project, otherwise they can reject the project. This means that project will deliver higher returns over the period of time than any alternate investment strategy.

In theory if the required rate of return or discount rate is chosen correctly by finance managers at Associations Cafe, then the stock price of the Associations Cafe should change by same amount of the NPV. In real world we know that share price also reflects various other factors that can be related to both macro and micro environment.

In the same vein – accepting the project with zero NPV should result in stagnant share price. Finance managers use discount rates as a measure of risk components in the project execution process.

Sensitivity Analysis

Project selection is often a far more complex decision than just choosing it based on the NPV number. Finance managers at Associations Cafe should conduct a sensitivity analysis to better understand not only the inherent risk of the projects but also how those risks can be either factored in or mitigated during the project execution. Sensitivity analysis helps in –

What are the uncertainties surrounding the project Initial Cash Outlay (ICO’s). ICO’s often have several different components such as land, machinery, building, and other equipment.

What are the key aspects of the projects that need to be monitored, refined, and retuned for continuous delivery of projected cash flows.

What will be a multi year spillover effect of various taxation regulations.

What can impact the cash flow of the project.

Understanding of risks involved in the project.

Some of the assumptions while using the Discounted Cash Flow Methods –

Projects are assumed to be Mutually Exclusive – This is seldom the came in modern day giant organizations where projects are often inter-related and rejecting a project solely based on NPV can result in sunk cost from a related project.

Independent projects have independent cash flows – As explained in the marketing project – though the project may look independent but in reality it is not as the brand awareness project can be closely associated with the spending on sales promotions and product specific advertising.

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Negotiation Strategy of Exploring Brand Associations in the Indian Context: Cafe Coffee Day

References & Further Readings

S. Ramesh Kumar, Eric Minj (2018), "Exploring Brand Associations in the Indian Context: Cafe Coffee Day Harvard Business Review Case Study. Published by HBR Publications.